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EDAP TMS S.A. (NASDAQ:EDAP)

Q1 2014 Results Earnings Conference Call

May 15, 2014, 8:30 AM ET

Executives

David Burke - IR, The Ruth Group

Philippe Chauveau - Chairman

Marc Oczachowski - CEO

Eric Soyer - CFO

Analysts

Suraj Kalia - Northland Securities

George Zavoico - H.C. Wainwright

Oliver Garn - PSM

Operator

Good day. And welcome to the EDAP TMS First Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to David Burke of The Ruth Group. Please go ahead.

David Burke

Thank you, Denise. With us today from management are Philippe Chauveau, Chairman of the Board; Marc Oczachowski, Chief Executive Officer; and Eric Soyer, Chief Financial Officer.

Before we begin, I’d like to remind everyone that management’s remarks today may contain forward-looking statements. These include statements regarding the company’s growth and expansion plans. Such statements are based on management’s current expectations and are subject to a number of uncertainties and risks that could cause actual results to differ from those described in the forward-looking statements.

Factors that may cause such a difference include, but are not limited to, those described in the company’s filings with the Securities and Exchange Commission.

Now, I’d like to turn the call over to Mr. Philippe Chauveau. Philippe?

Philippe Chauveau

Good day, everyone. And thank you for joining us on our first quarter 2014 investor conference call. As headlined in today’s press release, EDAP delivered record results for the first quarter and has achieved significant milestones since the beginning of 2014. Notably, EDAP generated all-time record high revenues of $10.6 million for the first quarter and strong operating profit of $765,000, a solid 7% of revenue.

As we progress through the second quarter, EDAP has a good device backlog, which we believe will help us continue this strong momentum as we enter the second half of the year. Also of note, EDAP continues to make significant progress with its HIFU PMA process with the FDA, and has received HIFU’s reimbursement from France’s Health Ministry.

With that, I’ll hand over to Marc.

Marc Oczachowski

Thank you, Philippe. And thank you all for joining us for our first quarter 2014 quarterly call. I will review recent developments across our business segments and then I will turn the call over to Eric to discuss the financial results for the quarter. Following Eric’s comments we will open the lines for any questions you may have.

2014 has gotten off to a great start and we are pleased with the direction in which the company is headed. Indeed, our sales in the first quarter 2014 reached an all-time record high. This was mainly due to significant HIFU sales, thanks to the great market enthusiasm and sales traction fueled by our recently launched Focal.One device, the only HIFU and non-invasive device dedicated to the focal treatment of prostate cancer.

We are pleased to report that during the first quarter we sold a total of five HIFU devices, including three Ablatherm and two Focal.One devices. It is very exciting and promising to see such market momentum for our new and unique Focal.One device less than a year after being CE Marked.

We clearly see growing interest in the device from urologists and we believe that there is a strong long-term potential for Focal.One to be viewed as the standard for care for the focal treatment of prostate cancer.

Also of note, with regard to Focal.One, the first treatments in Germany were recently initiated by Dr. Andreas Blana, Chief of Urology at Fuerth Hospital. Dr. Blana is one of our global experts in HIFU with a long track record of treating prostate cancer patients utilizing our HIFU devices. He is well positioned to assess the clinical and technical differentiators of our devices.

Putting these into numbers, our first quarter 2014 total sales grew by more than 30% as compared with the first quarter of 2013 and included a 137% growth in our HIFU revenue. This substantial growth shows the significant interest among the global urology communities for our unique and complete range of HIFU devices, including Ablatherm and Focal.One.

In addition to these recent successes of our HIFU sales, several key milestones were reached surrounding the HIFU technology. During the European Association of Urology, or EAU, Annual Congress held in Stockholm in mid-April treating prostate cancer using a targeted focal therapy approach was the significant and probably the most discussed topic.

Focal therapy represents a paradigm shift in prostate cancer treatment strategy in terms of targeting and treating the cancer tumors within the prostate gland instead of treating the whole gland. EDAP’s Focal.One device is at the forefront of this treatment approach, thanks to its enhanced imaging and targeted ablation capabilities.

In this environment, our HIFU Focal.One device is very well positioned as the most adapted tool to effectively address these new treatment strategies, offering both patients and urologists a unique way to control the disease by targeting only the lone cancer within the prostate while preserving quality of life.

Also, of importance during the EAU Annual Congress was the release of the updated EAU 2014 guidelines for prostate cancer treatment. The Association publishes treatment guidelines that are considered the primary reference for management and treatment of diseases such as prostate cancer by urologists in Europe. During its Annual Congress, the EAU released its 2014 guidelines for prostate cancer treatment.

Within these guidelines, HIFU is officially recommended by the EAU as a therapeutic option for both primary and salvage treatments. This is a significant progress in the recognition of HIFU. Within the 2013 guidelines, HIFU for salvage was recommended as an investigational option and HIFU as a first line treatment were not recommended. This is a huge achievement and a great reward for EDAP and all urologists that have been performing clinical trials and studies with this technology as part of the standard of care arsenal for the treatment of prostate cancer.

Another interesting point in these recommendations was the grade (indiscernible). The grade does not give a level of recommendation instead it respects the basis of the recommendation in terms of the trials and publications upon which the EAU’s recommendations are based. It is worth noting that salvage therapy was given ‘B’ recommendation this year as [comparative] [ph] data became available.

First-line treatment did not produce the grade but got a grade ‘C’ in 2014. This is certainly due to the three major publications on long-term results that were released last year in three major journals showing extremely high survival and freedom from metastases [10] [ph] years following HIFU. The studies included more than 2,000 patients treated with Ablatherm-HIFU.

We were still at the EAU Congress in Stockholm, Sweden when I personally received a call from the French Ministry of Health Cabinet, requesting a facility tour and face-to-face meeting with Ms. Marisol Touraine, the French Minster of Health. During her visit to EDAP’s headquarters on April 18, she outlined the acceptance of HIFU treatment for prostate cancer under the French national reimbursement system.

It is noteworthy and a long awaited milestone for the company, its business partners and its shareholders. It represents a significant catalyst for greater HIFU adoption in France and around the world. We are grateful for the support of the French Association of Urology, which initiated and worked on the reimbursement process over the last few years.

It is interesting and important to note that these two major developments along with significant improvement in the recognition process that are the EAU recommendation and the French reimbursement are the results of years of EDAP building the HIFU market under our initiated and scientific works. We can really feel there is no competitor to EDAP contributing to the market development of these technologies for the treatment of localized prostate cancer.

To recap, operations and projects in Europe and across key markets around the globe continued to be extremely exciting and successful, exemplified by the significant progress made since the beginning of the year.

Turning to the U.S., our Ablatherm-HIFU PMA application that was filed with the FDA for primary care treatment of prostate cancer is continuing to move forward through the Review Process. A significant amount of work continues to go into support of a PMA file as we managed to finalize our answers and comments to the Agency by sending a final submission in March 2014.

This is a great milestone that enables us to advance to the next phase which will be to present our complete file to the advisory committee. We continue to be in close and regular communication with the FDA in order to effectively reach that major milestone and we’ll communicate to the market as soon as we receive or confirmed days for this panel meeting.

The FDA project is clearly very active as we are now in the final stages of the approval process. Our entire team of experts is fully focused on preparing for the panel meeting during this critical stage. As outlined in today’s release, EDAP had a spectacular start to 2014 both in numbers and achievements. And we are well positioned to succeed in our challenging projects.

We enter the second quarter with heightened momentum and we will continue moving our operations and programs forward. I will now turn the line over to Eric who will discuss our fantastic results in greater detail. Eric?

Eric Soyer

Thank you, Marc, and good morning, everyone. As Marc just outlined, we achieved record results during the first quarter 2014. More specifically, total revenue for the first quarter 2014 was €7.8 million or $10.6 million, a 31% year-over-year increase compared to €5.9 million or $7.8 million for the first quarter 2013.

Total revenue for the HIFU division was €3.3 million or $4.5 million for the first quarter 2014, compared to €1.4 million or $1.8 million for the same period last year. Results for the first quarter of 2014 included the sale of three Ablatherm and two Focal.One devices.

For the first quarter 2014, total revenue for the lithotripsy division was €4.5 million or $6.1 million, in line with €4.5 million or $6 million during the year-ago period. During the first quarter 2014, the company recorded sales of nine lithotripsy machines, comprised of seven Sonolith i-move devices, one Sonolith i-sys device, and one Sonolith Praktis device, compared to a total of 10 devices sold in the first quarter of 2013.

Gross profit for the first quarter 2014 was €3.6 million or $4.9 million, compared to €2.2 million or $2.9 million for the year-ago period. Gross profit margin was 45.9% in the first quarter 2014, compared to 37.1% in the year-ago period. The change in the gross profit margin was mostly attributable to the increase in HIFU equipment sales.

Operating expenses were €3.0 million or $4.1 million for the first quarter 2014, compared to €3.4 million or $4.5 million for the same period last year. As a result of our increased device sales during the quarter, operating profit was €558,000 or $765,000 for the first quarter 2014, compared to an operating loss of €1.2 million or $1.6 million in the first quarter of 2013. Most noticeably, this is the first time the company reported two sequential quarters with positive operating income.

Net income for the first quarter 2014 was €840,000 or $1.2 million, or €0.04 per diluted share, as compared to a net loss for the first quarter 2013 of €3.9 million or $5.1 million, or €0.21 per diluted share.

At March 31, [2013] (ph), cash and cash equivalents, including short-term treasury investments, were €6.4 million or $8.9 million. The €1.2 million cash utilization in the first quarter was attributed to increased receivables related to increased sales in the first quarter to be collected over the second and third quarters.

With that, I will turn the call over to the operator who will open the line for questions. Thank you.

Question-And-Answer Session

Operator

(Operator Instructions) And the first question will come from Suraj Kalia of Northland Securities. Please go ahead.

Suraj Kalia - Northland Securities

So Marc, two things. Congrats on the French reimbursement, also the EAU guidelines, I think that bodes well. Keying off of the EAU part of the equation, Marc, maybe you can walk us through, if I remember correctly, some time back there was some discussion about mostly some of the early academic centers the ones that were in the trials in Europe, where you are seeing Ablatherm, how are you seeing changes, I know it’s a little early, but what changes are you seeing in the field that potentially bodes well from a utilization perspective, from a capital, sales perspective and just from an adoption perspective in Europe?

Marc Oczachowski

Again, the EAU guidelines are seen and followed by most of the urologists in Europe and in some other countries. And it’s a kind of again a warranty given by the urology authority that the technology is recognized and has proven again by publications of clinical trials that it brings a added value in the treatment of prostate cancer. So I think it still has an impact in the making of a broader adoption of the technology among the urologists fraternity.

Suraj Kalia - Northland Securities

And Marc, let’s say hypothetically, January 1, 2015, you will have U.S. FDA approval for Ablatherm. Marc, can you walk us through leading up to January 1, 2015, how do you see the sales force, the initial target centers that you guys want to go after? Any color would be great.

Marc Oczachowski

It’s a nice question, even though it’s a bit early for me to further comment on that. And I think one of the key milestones that we need to go through before starting to speak about that and even more publicly will definitely be the panel meeting.

Suraj Kalia - Northland Securities

And Marc, finally on the Focal.One, obviously you’ll have, right out the gate you’ve done a pretty good job on Focal.One in Europe, walk us through -- how should we look upon what physicians and clinicians are looking at? I’m just trying -- any color on adoption on the sentiment related to Focal.One would be greatly appreciated. Thank you for taking my questions.

Marc Oczachowski

Focal.One, what we can see as we are starting its sales and installations across Europe is we can really see a different population of urologists being interested in Focal.One as compared to the population that [was totally][ph] into the Ablatherm. And again, these urologists that are getting their first units installed are really surgeons oriented urologists that are really looking for a solution and an additional option to treat their prostate cancer patients without giving them surgery.

So really I mean what we anticipated in the discussion we’ve had while we were developing Focal.One is really becoming true as we are now implementing the installation of these new units, meaning that these high level surgery center, high level surgeon urologists losing kind of market share and a number of patients as surgery again in a lot of the early stage patients, is seen as another treatment and again they need a solution to give an appropriate treatment to these patients that again don’t want to be operated by surgery but don’t want to be also let on a watchful waiting status.

So they really need that tool and we can see a very high enthusiasm and a very positive reception of Focal.One as the tool that will allow those big and luminary centers of surgery for prostate cancer to continue improving and increasing a number of procedures by adding Focal.One to their surgical practice.

Operator

Our next question will come from George Zavoico of H.C. Wainwright. Please go ahead.

George Zavoico - H.C. Wainwright

Good morning and congratulations on the record results, very, very impressive. I have a question that sort of follows from the last one. The Focal.One versus the Ablatherm, I mean if I am a urologist and what would make me choose a Focal.One versus an Ablatherm? And do you see Focal.One eventually replacing Ablatherm because of its enhanced capabilities?

Marc Oczachowski

Actually, not, it’s really a range of products. So there are significant differences between the two devices. Even though we don’t see a lot of centers getting the two devices, it’s more of a strategic choice when you want to invest into an Ablatherm or a Focal.One.

Again, Focal.One is really dedicated for the focal treatment of prostate cancer, so it’s a great addition to a surgical practice and also there is the question of price because both devices having some substantial differences in terms of capabilities in both imaging and treatments would have different prices. So the choice for a urologist would be more in the use, in the intensive use of the device between focal and between a [relative] [ph] treatment I would say and also we give a choice, a financial choice, in terms of investment as Focal.One is a more expensive device than Ablatherm.

George Zavoico - H.C. Wainwright

And turning to the regulatory environment in the U.S., assuming you get Ablatherm PMA approval, how does that position Focal.One because I presume obviously you’d like to move Focal.One into the U.S. market, would that then be -- is it different enough for it to be -- to need to be a PMA or could you do the 510(k) process for that which would be a faster and more efficient?

Marc Oczachowski

We are really working hard now in the final stages of Ablatherm PMA process, so we will continue focusing ourselves on the Ablatherm with the FDA and then once we’ve got something significant there, we’ll see what will be the best way, but we can’t disclose and we can’t sort of comment on what would be the best strategy and also it will obviously depend on the regulations and the rules of the FDA process. We will obviously follow them.

George Zavoico - H.C. Wainwright

And final question regarding the -- I mean you are clearly still selling a lot of equipment and you’re going to selling more Focal.Ones I hope. What about -- can you break down what the revenue was from RPPs and leases and do you tend to grow that and expand that capability and if it’s so how do you intend to do that?

Marc Oczachowski

On the first quarter we grew our numbers in both RPPs and the machine sales and we, as we announced, we started on our RPP development in Germany by treating patients at Dr. Blana’s facilities. We also started our RPP in France, so we anticipate to continue growing our RPP numbers by adding the Focal.One to the portfolio of RPP products.

Operator

Our next question will come from Oliver Garn of PSM. Please go ahead.

Oliver Garn - PSM

I’ve got some questions regarding the revenue and the backlog, how much of the revenue in Q1 was somehow transferred from Q4 of last year, so let’s say the deal that you closed in Q4 and it was executed in Q1, was it a large part or a small part, maybe you could comment on that.

Marc Oczachowski

Well, we certainly had some backlog at the end of Q4 that were confirmed books for order that we executed in Q1. Giving you the exact number would be difficult right now, but it’s always the same that we kind of sign contracts and then for hospital availability for (indiscernible) consultation, and we sometimes deliver them on the next quarter, so and we’ve got some of the last year deals that were kind of delayed and we’re able to close in Q1, so again that’s a normal kind of process that sometimes the deals that we close on a quarter end, they are executed and recognized on the next quarter. So that happened really in Q4 and Q1.

Oliver Garn - PSM

Was it a large part or a small part?

Marc Oczachowski

We had a strong backlog as we announced. It was -- I mean to tell you if it was the majority on that, I don’t know, it was regular in terms of transferring deals from one quarter to the other in terms of between contracts and execution. I think it will be again, as we announced, in the press release as we have a strong backlog entering Q2 so we’ve got also deal close at the end of Q1 that will be executed and recognized in Q2.

Oliver Garn - PSM

That would be the second question. Could you quantify the backlog, somehow or the sales leads or something?

Marc Oczachowski

We quantified it and we announced that we had entering Q2 backlog of 10 lithotripsy devices and two HIFU devices.

Oliver Garn - PSM

Sorry, I didn’t understand.

Marc Oczachowski

We announced in the press release that was released this morning that we had 10 lithotripsy backlog and two HIFU devices backlog at the beginning of Q2.

Operator

(Operator Instructions) The next question will come from [Kerry Trechardin] [ph] a private investor. Please go ahead.

Unidentified Participant

On your recent press release, you mentioned the revenue per procedure used for the prostate treatment in Germany, is this a unit that you own or how do you range sale of the device, I mean it’s going to be generating revenue to EDAP on a per procedure basis?

Marc Oczachowski

It is a device. The (indiscernible) is a device that we own at EDAP and we will provide services on the device on a multi-year basis usually to hospitals that would [use] (ph) the device.

Unidentified Participant

This is a business model that I’m in favor of because it is a -- once the revenue per procedure is known then investors can quantify and forecast future revenues. Right now, this is one thing that I believe has been folding the valuation of the company down because there has not been good visibility of this number. And I’m wondering if sometime in the future you’ll be letting investors and owners know what you are actually trying to make on a per procedure basis, has that never been publicized?

Marc Oczachowski

No.

Unidentified Participant

Also, on units that you had sold outright, what are you doing to increase disposable revenues per procedure for units sold, and is there a revenue stream from disposables on a per use basis?

Marc Oczachowski

When we sell the device, there is a single use disposable associated with the treatment using the device, so if we have to treat a patient with our device, we will have to buy a single-use disposable from us that is called Abla pack on the Ablatherm and Focal pack on the Focal.One.

Unidentified Participant

And what type of disposable is this, is this some kind of a cover or is it something mechanical or electrical or what, can you describe that?

Marc Oczachowski

It’s a tubing system plus a cover of the probe that includes as well a chemical solution liquid that would help a good continuation of the waves that we can deliver the entire images from the probe to the prostates and we’ll also use that liquid that’s again using the system of tubes that we have on the disposable to cool the rectum walls so that we can avoid overheating at the rectum wall.

Unidentified Participant

This is a suite of let’s say a kit of disposables that you require for each use?

Marc Oczachowski

Exactly, it is a kit that -- it is required to be changed for each use. And it has a key role in the treatment.

Unidentified Participant

And is there anybody who has been trying to sidestep the use of that kit and buying generic type equivalents?

Marc Oczachowski

No, because first of all there are no generic type of kits and you guys needed to enter a code, a password that is unique and related to one pack. So you need the pack plus the password, so even if you would get a pack, you won’t be able to get the password for the device. So it’s well protected.

Unidentified Participant

That is fantastic. I didn’t think that you had this type of intellectual property. Now, what are you selling these disposable kits for, can you give investors an idea of how much revenue is generated on the sale of one disposable, one disposable and one procedure?

Marc Oczachowski

The price of the kit is on Focal.One around €900.

Unidentified Participant

And what is the profit margin on that, I presume it would be quite high?

Marc Oczachowski

Yes, and I won’t disclose it.

Unidentified Participant

When are you anticipating? You have the French reimbursement now approved and I would imagine that the EU in general would quickly adopt reimbursement protocol following on the tails of French approval, what would you anticipate to occur in the next 12 months?

Marc Oczachowski

Well, we usually don’t give too much of forward-looking statements, but again it is a significant progress in the adoption so that can certainly drive adoption on a larger scale and generate more sales and revenue for the company.

Operator

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Philippe Chauveau for any closing remarks.

Philippe Chauveau

There being no further questions, this concludes today’s EDAP investor call. Thank you everyone for participating on the call and I’ll talk you next time, good bye.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.

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